This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
I’ve just spent a week in Madeira. I had a lot of preconceived ideas about how winter there would be and it was – oddly – exactly as I expected: quite warm and full of old people meandering back and forth between their deck chairs and their various included-in-half-board buffet meals.
Both, from the point of view of the faintly exhausted parents of toddlers, are good things. Babies like warm weather and old people like babies. So we had a nice time.
But the trip also made us feel a bit nervous. Why? Because while we can afford the few winter weeks in Funchal now when we are both working we wonder how many of today’s thirtysomethings will be able to do the same when they are retired. Very few of us have contributed enough into our pensions to guarantee real 60+ security and, depending on which survey you believe, going on half of us have made no provisions whatsoever for our old age. Worse, only about 40% of us ever save at all, be it into a pension or a piggy bank at home.
Are you getting a real return on your savings?
And even if we are saving is it really doing us any good? Very possibly not. According to a survey from Investec, while around 40% of us are good enough to save regularly, only one in five of us know for sure what rate of interest we are getting from our savings accounts, and a third of us admit to having absolutely no idea at all.
This is pathetic given the risks inherent in most savings accounts. If you want to get a real return - after taking tax and inflation into account – you have to make over 3% as a lower rate tax payer and nearly 4% as a higher rate tax payer, while the average rate on UK based savings accounts is a mere 3.4%. And that’s using the Consumer Price Index as a measure of inflation when we all know that prices are rising at much more than the 2.2% the government’s preferred measure suggests. Note that the CPI calculation leaves out the prices of almost all the things that are rising fast in price including food costs and energy costs.
That makes the Retail Price Index a better measure – and that’s rising at 4.1%, twice the rate of the CPI. It is also likely to keep rising: the oil price is showing no signs of falling back below $90 a barrel and food prices are still on the up. On Monday alone the price of top quality wheat rose 25%! On the current RPI you need to make 5.13% to break even in real terms as a lower rate tax payer and 6.8% as a higher rate tax payer.
Check your personal inflation rate
But look at how you spend (everyone’s personal inflation rate is different depending on how they allocate their own spending power) and you might find even that wouldn’t be enough to allow you to maintain your standard of living. Note that the price of one of a pensioner’s necessities (tea) rose 6.5% last year and prices in Kenya have jumped another 28% or so since the disputed elections in December.
None of this bodes well for us and matters aren’t helped by the fact that house prices are falling, that taxes are soon to rise (there is already talk of an increase in national insurance or a special health tax of some kind being introduced in next week’s budget), and that the sharp slowdown in the economy suggests a good few of us will soon be unemployed.
Three things you should do now
So what can we do? The usual. Make sure we use our Isa allowances – at least the interest on a cash Isa is tax free so you are pretty much certain to make a real return. Contribute as much as we can into our pensions – again their tax status helps out when it comes to making real returns. But most of all we can make absolutely sure that what money we have saved into ordinary bank accounts is not being whittled away by inflation. Click here to find the highest paying bank accounts on the market: compare savings accounts
This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense